Economics, public policy, monetary policy, financial regulation, with a New Zealand perspective

Time to let the sunshine in

Former US Supreme Court Justice Louis Brandeis was the author of the famous line that sunshine is the best disinfectant, arguing for greater transparency in government agencies and the political process. There is no perfect system, and probably no country reaches an ideal standard, but as governments around the world have become more intrusive and more powerful there have at least been some important counterbalances developed. One of the most important has been the passing of freedom of information acts – our own dating from 1982 – which typically help move towards a presumption that information held by government agencies is accessible to citizens unless there is a compelling reason otherwise. In making primary legislation (passing Acts of Parliament) Parliament now uses select committees much more extensively than was once the case and there is recognition, reflected now in established practice (Parliament itself not being subject to the OIA), that submissions to such committees, from people trying to influence our laws, should be made public on a timely basis.

The timely publication of submissions – whether to, eg Productivity Commission enquiries, to local councils reviewing district plans, or to government regulatory agencies – is increasingly becoming the norm.

There is, however, one notable blackspot in this generally positive story. The Governor doesn’t invite public submissions on the OCR, but if you send him one anyway, it will be discoverable under the Official Information Act – there is presumption in favour of release, unless there is a compelling specific ground not to. But make a submission on a regulatory initiative – where the Bank is required to consult, take submissions, and have regard to those submissions when the Governor makes his final decision – and anyone who wants to see that submission will face a barrage of obstructionism, some of it enabled by old legislation that simply hasn’t kept up with how the Bank’s extensive powers have evolved.

Last year, for example, various government agencies were doing things about housing. The new brightline test and associated tax number provisions required parliamentary legislation. All the submissions on these issues were published shortly after they were received. The Reserve Bank put out proposals for a new round of LVR controls. The Bank first refused absolutely to publish any of the submissions, even after the event, arguing that the summary of submissions that it wrote itself should be quite enough. After several OIA requests, it finally backed down a little and agreed to release the submissions made by people who weren’t themselves regulated entities (ie those of people like me)- but by then it was well after the decision had been made.

In their regulatory stocktake last year the Bank responded to several submissions and indicated that it would take another look at moving towards routine publication as the norm. That sounded encouraging, but nothing was heard for many months, and then finally in May they released a consultative document on the publication of submissions on consultative documents. By this time, they were clearly mostly interested in defending the status quo – publishing only their own, belated, summary of submissions. That is apparent in the text, and also in the time they allowed for consultation: not seeking to change the status quo, they allowed almost three months for interested parties to make submissions. By contrast, on stuff where they want change – eg the latest LVR proposals – three weeks’ consultation is deemed more than enough (“more than” since they are urging banks to apply the “spirit” of the new rules, even though the Bank has to be open to reaching a different view in light of submissions received).

My own submission on the consultation on the publication of submissions is here.

the status quo (summary of submissions and whatever they might eventually be forced to release under the OIA)

an alternative in which the Bank would publish all or part of submissions (timing of publication not clear) but only when submitters given their explicit consent.

The second option is not really a step forward at all. The submissions the public need to be most worried about are those where submitters might refuse consent. What, we might reasonably, wonder are they trying to hide – wanting influence over our laws, without enabling the public to know what they are arguing. This is particularly an issue in respect of regulated entities, where regulators can get all too solicitous of the interests of the regulated. But it isn’t just regulated entities who should concern us.

The Reserve Bank’s stance seems to be a combination of genuine obstructiveness – “rules and principles that apply elsewhere in government really shouldn’t apply to us” – and some genuine legislative constraints. Section 105 of the Reserve Bank Act – and parallel provisions in other legislation the Bank operates under – prohibits the Bank from releasing “information relating to the exercise, or possible exercise, of the powers conferred by this Part” of the Act (prudential regulatory and crisis management powers). The Bank argues that they can – but don’t want to – release submissions from other interested observers, but simply cannot – even if they wanted to – release submissions on possible rule changes from regulated entities.

But here’s the thing: in section 105 there is no distinction drawn at all between information or views obtained from “regulated entities” and that from citizens more generally. If the Reserve Bank really thinks these provisions apply to submissions on possible law changes (in this case, changes in banks’ conditions of registration), it cannot release any submissions at all. But it can’t just pick and choose which it wants to release and which it does not. They haven’t produced anything more than assertions in support of their interpretation. One alternative possibility is that these provisions apply only to commercially confidential information – which is in any case protected by the OIA, but which does not include an institution’s views on appropriate regulatory policy.

But there is a solution – and really rather an easy one. If section 105 really does constrain the Bank’s ability to be open and transparent, it is open to them to approach the Minister of Finance (and Treasury) and seek a simple change to the Act. It should be easy enough to draft a short clause that provided that any submissions, from any party, on possible rule changes affecting all, or significant subset, of a class of regulated entities were not subject to section 105, and were fully subject to the provisions of the Official Information Act. Ideally, such a amendment would go a little further, and require all such submissions to be published on the Bank’s website on the day submissions close. It is difficult to imagine who would oppose such an amendment. Which opposition party is going to vote for greater bureaucratic secrecy? Perhaps some banks might object – but these same banks know that when they make submissions to select committees or to other regulatory bodies those submissions will typically be published on a timely basis as a matter of routine. If the Minister of Finance – who seems strangely reluctant to touch the Reserve Bank Act – wasn’t willing to make even this simple amendment, perhaps some backbencher with a serious commitment to open government could put such a provision in a draft bill in the members’ ballot.

I said that the legislative constraints mostly reflected old legislation that hadn’t kept pace with the changing role and powers of the Bank. The section 105 provision dates back to 1987, a time when the Reserve Bank had very few supervisory or regulatory powers. The older banks were established by their own acts of Parliament (rather than Reserve Bank registration) and these confidentiality provisions were, in effect, mostly about the ability of regulated entities to provide sensitive material to the Bank in an urgent and unfolding crisis situation. Most people probably have little problem with protections of that sort – although arguably the OIA provided them anyway. There were no consultations on discretionary changes in regulatory policy, because there were no such changes. LVR restrictions have really been the discretionary initiatives which have had the most pervasive effects – using conditions of banks’ ongoing registration as an instrument of short-term macroeconomic policy. But the Reserve Bank did not even have the powers to impose LVR restrictions until an amendment to the Reserve Bank Act in 2003. And even then, for a decade afterwards such powers weren’t used.

So if section 105 really protects the confidentiality of submissions on new regulatory initiatives, it is an unintended consequence. It is a most unfortunate one – in an open society, lawmaking and the material lawmakers draw on, should be open to public scrutiny. But it is also an easily remediable one. It would be good to see the Reserve Bank re-think its stance, and approach the Minister of Finance seeking the sort of change I outlined above. At present, foreign regulators have better access to the views of people maming submissions on our laws than our own citizens do. And it is all the more important to fix this issue given that so much power in vested in a single unelected official – who faces little or no effective accountability, and too little responsiveness to the concerns of citizens and voters. The Reserve Bank is a regulatory agency, not an institution warranting the deference and protections that, say, the Supreme Court might enjoy.

(An interesting example of where we really should have timely access to all submissions is highlighted by the article a couple of weeks ago from the ANZ’s Australian head of New Zealand operations, David Hisco. Hisco argued that the new LVR restrictions should be even more onerous than what the Reserve Bank was proposing. But is he serious, or was he just wanting to convey the impression that he was a “banker who cared”? There are not entirely-public-spirited reasons why bankers might favour tight restrictions on new business – they might for example think they would be more temporary than higher capital requirements – but at present we don’t even know whether Hisco is serious in his call for even tighter LVR controls. His economics team didn’t seem very convinced even by what the Reserve Bank was proposing, but if he is really serious about the substance of his proposal, presumably it will be reflected in ANZ’s submission to the Reserve Bank this week or next, complete with supporting analysis. If not, we can draw our own conclusions. Either way, if the Reserve Bank has its way, we simply won’t be able to know.)

As this consultation itself (on the publication of submissions) is not about the exercise of powers under Part 5 of the Reserve Bank Act, I have lodged an OIA request for all submissions the Bank receives on it.

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2 thoughts on “Time to let the sunshine in”

ANZ adherence to the call by the RBNZ for a 40% LVR on property seems to be somewhat confused and inconsistent compared to the other banks. I think the Hirsco fiasco has contributed to this confusion amongst its management team. They have left it very much to managers discretion as different managers have applied that rule quite differently. The other banks have been clearer to exclude the 40% LVR rule on new builds for all purchasers including property investors.